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Speech to the Heads of Tax Roundtable, Melbourne



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Kelly O'Dwyer Minister for Small Business Assistant Treasurer

SPEECH

HEADS OF TAX ROUNDTABLE MELBOURNE, 16 FEBRUARY 2016

E&OE

Introductory remarks

It is great pleasure to be with you today - spread throughout various locations around

Australia - to talk through some of the Australian Government’s corporate tax work and

priorities.

As some of Australia’s leading tax practitioners, you will have a deep interest in the integrity

of our tax system. That we have a tax system designed to meet the challenges of an

increasingly dynamic and complicated commercial world. A tax system that is robust enough

to ensure companies are paying the right amount of tax, while giving commercial certainty

and predictability to companies that are trading across multiple jurisdictions and dealing

with multiple tax authorities.

Australians rightly demand that our tax system is designed and administered to ensure that

everyone pays the tax they owe to the Australian people - and this includes corporate

taxpayers.

They rightly expect that integrity of the Australian tax base is a core feature of our tax

system.

Today I want to talk to you about some of the measures that the Turnbull Government is

pursuing to deliver greater integrity, transparency and opportunities in our tax system.

This includes tackling multinational tax avoidance, the work of the Board of Tax, measures

to encourage investment, and tackling some anomalies in our tax rules.

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Given that the Treasurer is addressing the National Press Club tomorrow, I will not be

addressing the Government’s tax white paper process in my speech. I am very happy at the

conclusion of my prepared remarks to take some broad questions.

Multinational Tax Avoidance

The Turnbull Government has made no secret that we are not happy with the approach

taken by some corporates to their taxation obligations in Australia.

While most Australian companies do the right thing and scrupulously adhere to the law and

pay their fair amount of tax, there are some companies that have not acted as good

corporate citizens.

Some multinationals employing methods that could be described as overly aggressive tax

planning arrangements at best, are now the focus of overseas tax authorities and the

Australian Taxation Office to ensure they are paying the right amount of tax.

Fair-minded Australians have a right to be angry that some multinationals that derive

considerable economic benefit from business in Australia, and earn Australian-sourced

taxable profits, are shirking their Australian tax obligations. This forces Australians who do

the right thing, to pay more tax or miss out on community services or investment.

It isn’t right. It erodes our tax base. And it won’t continue under this Coalition Government.

That is why we have taken strong action both domestically and internationally to close

loopholes for multinational tax avoidance. This includes strong new multinational anti-avoidance laws, new information sharing arrangements, more powers for the Australian Tax

Office to enforce the law, and a doubling of penalties on large companies that are avoiding

tax.

These changes make Australia one of the toughest countries in the world on multinational

tax avoidance. The Tax Commissioner Chris Jordan noted last week during his grilling at

Senate Estimates that “Australia’s laws are stronger than ever”.

He is right. Our government has acted to ensure our tax system can keep up.

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Unfortunately, the former Labor Government failed to ensure that our tax system kept pace

with the changing realities of the commercial world and new profit shifting opportunities.

With the growing importance of intellectual property, digital technology and integrated

global supply chains - change was required to our tax system.

We are absolutely committed to shutting down tax avoidance strategies used by

multinationals that have too easily been able to exploit gaps and mismatches in our

international tax system and weaknesses in Australian domestic tax law.

So what have we done about this?

In 2014 we tightened thin capitalisation rules to stop multinationals claiming excessive debt

deductions.

We introduced the new Multinational Anti-Avoidance Law to stop companies artificially

structuring themselves to move profits from doing business here to low tax countries

offshore.

We introduced country-by-country reporting and the common reporting standard.

Penalties for profit shifting have also now been doubled so that large companies caught out

have to pay not only the tax that they sought to avoid, but a penalty of up to 100 per cent of

that tax.

Importantly these tougher laws are supported by the Australian Tax Office that has been

given the resources and the support to enforce them.

The ATO has expanded their international team. It is now larger than it was under the

previous Government.

Last week before a Senate Estimates hearing the Tax Commissioner outlined the ATO’s no-nonsense approach to tax avoidance. And I quote Chris Jordan:

“My message to companies operating in Australia is clear - you must pay your

fair share of tax on the profits you earn. There is no getting around it, there are

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no exceptions to be made, and there is no weakness in our resolve to administer

the tax system.”

While stressing that the majority of companies do the right thing, he put tax avoiders on

notice. Again he said:

“These companies have pushed the envelope on reasonableness - they play the

game, they string us along, they believe we can be stooged. Enough is enough.

No more. We will be reasonable with those that genuinely cooperate, but we

will now take a much harder stance on those who do not.”

The resolve of the Australian Taxation Office is clear and the resolve of the Government is

clear.

The Turnbull Government is committed to cracking down on those companies that are

dodging their tax responsibilities.

Through the International Structuring and Profit Shifting project, which is run by the ATO,

over $400 million in liabilities has already been raised.

Further to this, our Multinational Anti-Avoidance Law is already underway and the tax office

has focused on almost 400 taxpayers as a result.

Significantly, while the law came into effect on the first of January this year, the ATO has the

ability to pursue arrangements that were entered into before this date.

We have seen some good will with companies contacting the ATO proactively to correct

their tax arrangements. And this is the prudent and sensible thing to do.

Australia has led the world on the global action plan on multinational tax avoidance - most

particularly when we Chaired the G20.

The Government will continue to work with the OECD and other countries to implement

other OECD Base Erosion and Profit Shifting recommendations in a way that will maximize

their effectiveness.

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As part of the BEPS plan, as it is known, Australian was one of 31 countries to recently sign a

multilateral agreement to share tax information on the activities of multinational

companies.

We have also introduced into Parliament legislation to impose GST on imported digital

products and services. We will introduce legislation to impose GST on low value goods

purchased from overseas which are currently exempt.

From next year foreign businesses will have to compete on the same playing field as local

Australian businesses.

So, what’s next?

The Government is finalising options for a tough new tax taskforce to ensure that

multinational corporations operating in Australia pay the right amount of tax on the

economic activity that is taking place here in Australia.

The Government will continue to provide the resources to the ATO to ensure this happens.

This new tax taskforce will be accountable to the government through transparent reporting

and also it will be very clear and transparent to the Australian public about the

achievements and the progress that’s being made.

We are currently evaluating international models, including in the UK and United States,

where whistleblowers are protected and, in some cases, rewarded.

We are considering changes to our laws to encourage whistleblowers to reveal information

on artificial tax structures and misconduct.

Further on the issue of transparency, last year you will be very aware that the ATO publicly

released tax information on large public companies. The disclosure arrangements have now

been extended to include large Australian private companies, and the tax information will

be released by the Australian Taxation Office next month.

We are taking these tough actions to ensure that Australians have confidence in the

integrity and fairness of our taxation system.

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Board of Taxation

I now would like to talk to you about some of the work of the Board of Taxation is

conducting, that I am sure many of you have been participating in, or at the very least will

have an interest in.

Voluntary tax transparency code

First, the voluntary tax transparency code. As part of the 2015 Budget, the Board was asked

to lead the development of a new voluntary code to provide greater public disclosure of tax

information by businesses, particularly large multinationals.

I note that the draft Code is stronger than the tax transparency measures of other counties.

A consultation paper containing a draft tax transparency code was released publically in

December last year.

The paper sought to strike a balance between community interest in public disclosure, the

additional regulatory burden on business, and commercial sensitivities. The submission

period closed on 29 January this year and the Government regards this work by the Board

and industry as absolutely critical to establishing a code that provides useful information for

the community.

The Government is looking forward to receiving the Board’s report very soon.

Consultation on the implementation of the anti-hybrid rules

As part of the 2015-16 Budget and coming out of the G20/OECD BEPS Action Plan, the Board

was asked to undertake consultation on the implementation of new tax laws to neutralise

hybrid mismatch arrangements.

The Board’s Working Group released a public discussion paper in November last year,

followed by consultations.

The Board will report to the Government over the next few months.

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Current legislation

Moving on from the Board of Taxation’s work in conjunction with the Government, let me

touch on some current legislation and some of the stock-take of legislation that needs to be

dealt with which we are focused on at the moment.

There were, as many of you know, 92 announced but un-enacted tax and superannuation

measures that the Government inherited from Labor in September 2013.

Of these, the Government announced in December 2013 that 37 of those would proceed.

And today, just six measures remain to be dealt with, taking into account the three

measures that have been passed by the House and now have moved to the Senate. The

three measures are:

1. Capital gains tax treatment of earnouts:

The origins of the measure lies in an ATO draft ruling that specified that an earnout right is a

separate and distinct asset from the underlying business and must have its market value

estimated for CGT purposes.

This was followed a few years later by an announcement in the 2010-11 Budget to provide

CGT look-through treatment for earnout arrangements but it was never enacted.

The amendments will apply to all earnout arrangements entered into after 23 April 2015,

the first working day on which draft legislation to give effect to this measure was made

public.

In addition, to protect taxpayers who have reasonably and in good faith anticipated changes

to the tax law in this area as a result of the announcement by the previous Government in

May 2010, the measure also includes protections to preserve their current tax outcomes.

2. A new withholding tax to improve compliance with Australia’s foreign resident capital

gains tax regime:

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This measure was announced by the previous Government in 2013. From 1 July 2016, there

will be a 10 per cent non-final withholding tax obligation on a purchaser of certain taxable

Australian property where the vendor is a foreign resident.

Foreign residents are liable to pay CGT where they dispose of certain Australian assets,

notably direct and indirect interests in Australian real property - that is land, housing,

commercial property, shares in land rich Australian entities.

The measure will address difficulties associated with collecting tax from foreign resident

taxpayers and ensuring that they comply with their Australian tax obligations.

3. Managed investment trusts:

The implementation of the new taxation system follows recommendations made by the

Board of Taxation in its 2009 report on the review of the tax arrangements applying to

Managed Investment Trusts (MITs).

The Government is introducing these Bills to modernise the tax rules for MITs.

The new tax system will address long-standing uncertainty and complexity in the tax rules

applying to MITs and to investors.

The new tax system will significantly reduce compliance costs for MITs by $30 million per

year. Compliance by investors will also be simpler.

It will make it easier for MITs to offer different investment products through a single trust

and give trustees practical options for reporting income to members.

Introducing this new system will enhance the competitiveness of Australia’s funds

management industry and will help to attract more investment into Australia, including into

important areas such as infrastructure.

This will help make Australian funds managers more internationally competitive and

promote the greater export of their funds management expertise.

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The MIT system will encourage Australia’s managed funds industry to grow by exporting

more of its expertise, and attract additional inflows of investment. This will in turn increase

growth and increase jobs.

Closing loopholes in the consolidation regime

On 6 November 2013, the Government announced it would proceed with integrity

measures to improve the operation of the consolidation regime.

These measures were recommended by the Board of Taxation.

The Government understands the need to resolve this matter as soon as possible to

minimise disruption and provide certainty for taxpayers for past transactions. The

Government hopes to have legislation introduced in the 2016 winter parliamentary sitting.

Debt/Equity tax rules

The Government is also developing draft legislation for debt/equity tax rules.

This is expected to be released for public consultation in the coming months.

Innovation

Finally, in December last year, the Government announced the National Innovation and

Science Agenda (NISA) to drive new investment and innovation in Australia. I’m very pleased

that the measures included new tax incentives for early stage and late stage investors.

The tax incentives will provide concessional tax treatment for investors through a non-refundable tax offset and a capital gains tax exemption on investments that meet certain

criteria.

The tax incentives are designed to encourage investment into Australian innovation

companies.

Separate initiatives have also been announced relating to investment at later stages,

including reforms to early stage venture capital limited partnerships (ESVCLP) and venture

capital limited partnerships (VCLP).

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The approach taken for the incentives has been designed to be world’s best-practice and

developed with reference to other jurisdictions including that of the United Kingdom and

Singapore.

The Government is developing a principles-based approach to the design of the legislation

to ensure that incentives continue to encourage investment into the future as technologies

and as activities change.

Specifically on the non-refundable tax offset:

These incentives will provide eligible investors with a 20 per cent non-refundable tax offset

for the amount paid for newly issued shares in an innovation company, where the amount is

paid either directly to the innovation company or indirectly through a qualifying innovation

fund.

Investors will receive a non-refundable tax offset of up to $200,000 on an affiliate-inclusive

basis for investments, direct or indirect, in eligible innovation companies in an income year.

The tax offset will be available to both residents and non-residents.

This means that for investments for up to $1 million, investors receive the full 20 per cent

non-refundable tax offset. Investment amounts greater than $1 million in an income year do

not increase the amount of the offset available.

In addition to receiving the tax offset, investors will not pay any CGT on gains from the

disposal of shares in an innovation company provided those shares are held for at least

three years. This applies to both resident and non-resident investors.

Where shares are held for more than 10 years, any incremental gain in value after 10 years

will be subject to CGT and deemed to be on capital account.

Capital losses will be unavailable for shares issued as part of these tax incentives for early

stage investors.

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Conclusion

Ladies and gentlemen, the Turnbull Government is committed to delivering a tax system

that is fit for the 21st century.

A tax system that provides greater efficiency, greater certainty and greater opportunity to

create a stronger, growing economy. It must be a taxation system that delivers integrity,

that preserves our tax base and delivers fairness.

As you can see, just from the short summary of things we have touched on here today, we

have a lot on the agenda and we are working very hard to deliver on this goal.

Thank you.